Suppose an item sells for $125 in the United States and for 62,500 pesos in Chile.According to the law of one price,the nominal exchange rate (pesos/dollar)should be ________.

Question

Quizplus · Accepted Answer

The law of one price states that in the absence of transportation costs and barriers to trade, identical goods should sell for the same price in different countries when prices are expressed in a common currency. To find the nominal exchange rate (pesos/dollar) that would make the price of the item the same in both countries, divide the price in pesos by the price in dollars: 62,500 pesos / $125 = 500 pesos/dollar.

Suppose an Item Sells for $125 in the United States